Does this make sense ?

[Charles Chiu]

Hi I am a newbie to BRRR and I am looking at a potential first deal. Here are the numbers and the way i think of it. I would love to hear your opinions. Thanks in advanced.

purchase price: 150k
rehab estimate: 180-200k
ARV: 360-400k
rent estimate 2,880
loan interest rate: 7.25%
cash flow: $100 / month

Based on the analysis i did, the monthly cash flow would be somewhere around 100 bucks if I manage the property myself and very thin on reserve and potential vacancy. 

i think there are 3 potential risks I can identify.

1. ARV may not be as expected
2. Rent may not be as expected
3. Have a good chunk of cash locked in the property after taking out 75% of ARV

However, there are also positive factors:

1. There could potentially be 50+k equity gain
2. IF (and a big IF) interest rate goes down in the next 12-24 months, cash flow can be better after refinance

This is my first potential BRRR project and am a bit nervous because of the amount of rehab required.
Just want to know if there is any major pitfall in the logic above.
Thank you! Thank you!

[Andrew Postell]

@Charles Chiu Ok, I need to try to express some things here and probably ask your forgiveness in how I present them.  This is typing on a forum - I can't express inflection here.  So I'll just put this to the point.  Just be aware that I don't mean this in an aggressive way but I do need to be direct about some of the elements of this deal.

1. If your purchase price is $150k and your rehab is $200k that means your total acquisition cost is $350,000.

2. If your ARV is $350,000 you are NOT to do this deal at all.  It would be less risky AND less out of pocket if you were to go buy a "move-in-ready" home at $350,000.  $350,000 x 20% down = $70,000.  So if you have to come out of pocket $90,000 on this home then you are spending too much for this property.  Wewant to BUY and REHAB at 75% of the total ARV.  So if the ARV is $350k...then your TOTAL acquisition costs should not be more than $262,000.  Ok, maybe you can do it at $270,000 or so...but certainly not if the total acquisition costs are the same as the value.  You need buffer here.  I would suggest a buffer of 25% of the ARV...but maybe I can be convinced of 20% of the ARV - maybe.

3. Now the ARV - this should be done by your realtor. We only have 2 options here in Texas - the appraiser or realtors. Your real estate agent should be able to do this at the AFTER REPAIR VALUE. If your realtor is saying "well, there's no comps for this type of property" then head for the hills! With the BRRRR Method you need definitive comps. It is a must. And your realtor needs to be good enough to know what the value is. Again, just being direct here so forgive me for not dancing around it.

4. Something isn't right about your mortgage payment. Are you just using the current property taxes or something? Keep in mind that once you purchase the property all of the property tax exemptions go away. And then the county will re-appraise the value. I would highly recommend using the property tax amount at the ARV of the property. No SFH in Texas can cash flow with a Long Term Lease at the numbers you shared. Something is up there.

Sorry for being so direct but just wanting to get my points across.  I do only mean to help. My first property was similar to what you are looking at here...except mine was $30,000.  Designed, on purpose, to limit my risk.  

[Taj Akinbode]

Where are you getting your ARV and rental comps data from? It's crucial that these figures are accurate.

[Andrew Postell]

@Charles Chiu this is good to post these things.  There are several things for you to consider here:

1. How will you acquire the property?  If you need a loan, how much of a loan will you receive on your BUY step?

2. How much of a loan will you get on your REFINANCE step?  Without this information, you cannot accurately calculate your cashflow (maybe you have it but we cannot see it).

3. This property COULD be $50k in equity...but in your own math it also COULD be $10,000. When we calculate the ARV having a $40,000 range is too large. Get hyper accurate on this figure. Keep in that even at $50,000 in equity could result in you coming out of pocket tens of thousands of dollars.

4. I would not recommend doing a rehab this large for anyone's first deal without help from someone else.

5. Where did you get that rehab number from?

Those are my initial thoughts on this deal.

[Charles Chiu]

@Taj Akinbode

I got that from my realtor. He's also an investor. Basically, what I posted was what he shared with me. Is there anything concerning? Please share your opinion. I really appreciate you taking your time to educate me here. Thanks!

[Charles Chiu]

@Andrew Postell

1. We're thinking about owners financing for acquiring the property and then I have a private lender for the rehab portion. Ideally, they will all agree on using current market interest rate.

2. If we go with owners finance and private lender route, there won't be refinance step. However, I would consider dumping my own cash into the project so that I can have the total financed amount down to around 262k and that's equivalent to having 75% ARV refinanced assuming the ARV is 350k. Except in this case, I can skip the processing fees. So my total cash out of pocket would be around 90k (hope my math is right here). Also, this is how that 100 dollar cash flow calculated.

3. You are definitely right. This is under an assumption that I would have about 90k cash dumping into the project and I'm hesitating on that. It seems a lot of cash locked in one deal isn't it? Also, I definitely agree with you that ARV range is large but is there anyway we can find out a more accurate estimate? Without rehabs, appraisers won't be able to estimate right? Or am I having a false assumption here? Honestly, these are the key uncertainty makes me feel anxious 😓

4. Definitely right! I was talking my realtor to be part of this project if I were to move it forward. However, we have not yet talked about how we would partner up.

5. The rehab number was from one of the contractors bid. My realtor has already started receiving bids.

Once again, I really appreciate you taking your time helping me learn to do it. I'm excited about the opportunity but yet I am also aware that current market is not as forgiving. So I want to take extra precautions and learn from experienced investors like you. Thank you!

[Alex Cee]

I wouldn't think this would be a good choice.

1. I'm not sure what your skill level is to assess rehab costs - this can easily shoot up 10%

2. Are you planning an extensive inspection?

3. Laying out downpayment + rehab costs + time, is it still worth it if you make 10K?  That's also potentially not the worst case scenario if #1 changes...

[Charles Chiu]

@Alex Cee

Thank you for your feedback.🙂

1. I am a super newbie to BRRR. So I would think my skill level to assess rehab cost is nearly non-existent at this moment. So in this case, I have to rely heavily on my realtor who is an experienced investor.

2. Extensive inspection before acquiring the property? I have not thought about it. Thanks for the feedback. I think that should be done.

3. From a number perspective, 10k may not be attractive enough. From the experience perspective, it may make more sense. But then again, I can already argue with myself that I would probably be better off picking up a smaller deal to gain that experience gradually. Thank you for pointing out the thought with me.🙏

[Andrew Postell]

@Charles Chiu Ok, I need to try to express some things here and probably ask your forgiveness in how I present them.  This is typing on a forum - I can't express inflection here.  So I'll just put this to the point.  Just be aware that I don't mean this in an aggressive way but I do need to be direct about some of the elements of this deal.

1. If your purchase price is $150k and your rehab is $200k that means your total acquisition cost is $350,000.

2. If your ARV is $350,000 you are NOT to do this deal at all.  It would be less risky AND less out of pocket if you were to go buy a "move-in-ready" home at $350,000.  $350,000 x 20% down = $70,000.  So if you have to come out of pocket $90,000 on this home then you are spending too much for this property.  Wewant to BUY and REHAB at 75% of the total ARV.  So if the ARV is $350k...then your TOTAL acquisition costs should not be more than $262,000.  Ok, maybe you can do it at $270,000 or so...but certainly not if the total acquisition costs are the same as the value.  You need buffer here.  I would suggest a buffer of 25% of the ARV...but maybe I can be convinced of 20% of the ARV - maybe.

3. Now the ARV - this should be done by your realtor. We only have 2 options here in Texas - the appraiser or realtors. Your real estate agent should be able to do this at the AFTER REPAIR VALUE. If your realtor is saying "well, there's no comps for this type of property" then head for the hills! With the BRRRR Method you need definitive comps. It is a must. And your realtor needs to be good enough to know what the value is. Again, just being direct here so forgive me for not dancing around it.

4. Something isn't right about your mortgage payment. Are you just using the current property taxes or something? Keep in mind that once you purchase the property all of the property tax exemptions go away. And then the county will re-appraise the value. I would highly recommend using the property tax amount at the ARV of the property. No SFH in Texas can cash flow with a Long Term Lease at the numbers you shared. Something is up there.

Sorry for being so direct but just wanting to get my points across.  I do only mean to help. My first property was similar to what you are looking at here...except mine was $30,000.  Designed, on purpose, to limit my risk.  

[Andrew Syrios]

You're looking to be all in to this property at $330-350,000 and it's only worth a little more than that. That's not nearly enough for such a huge rehab like this, especially since rehab budgets tend to be too low. I would pass

[Hamp Lee III]

Great inputs here!

I agree that you should start on a smaller project with just cosmetic issues. Nothing too major where you could quickly sink.

I wish you all the best.

[Ehab Shoukry]

@Charles Chiu to answer your question this does not make any sense at all. You've completely missed the intent of BRRRR investing which is to buy and renovate a property and then refinance so that you can cash out and have as little money invested as possible.

The whole point of doing the rehab and being a value add investor is to get rewarded at the end with a property that has a lot of equity and little cash tied up. 

You are not going to have either. So no this is a terrible deal and wayyyyy too extensive for a newbie based on your rehab budget. 

Ehab

[Bryan Scott]

Sorry, if some of this is repetitive.  This one sounds like a gut, studs-out rehab.

You mention you're a newbie...  That said, add at least 20% to your rehab budget for all the mistakes you will make.  Even without the cost overrun just mentioned, based on your numbers, you are going into this one with no equity (personally, I wouldn't touch it unless I thought I could go in with at least 15% equity, because at the end, it'll be less anyway).

This looks like any other retail deal out there, but with a lot more risk because of the extensive nature of the rehab implied by your estimate. Your ARV range should be tightened up. This can be accomplished with a comprehensive CMA from a licensed agent.

Long story short - take a pass on this one.  Make your mistakes on a cosmetic, facelift sort of rehab.  Then, rinse and repeat till you feel confident in all of your numbers and your contractors.  If you decide to go forward, get a seasoned partner, but right after I say this, I am reminded that no seasoned partner will be OK with no equity going in and the projected cashflow will not attract anyone with any experience.